Federal spending includes purchases of goods and services by the U.S. government and transfer payments.
Federal government purchases of goods and services are not included in GDP.
Transfer payments are not included in GDP because they do not represent any currently produced goods or services.
The Congressional Budget Office is a nonpartisan agency of Congress that provides both budgetary forecasts and historical data on the budget.
The table provides key data on federal expenditures for fiscal year 2014, both in absolute dollar terms and as a percent of GDP.
The budget has broad categories.
In the fiscal year that ended in June, total spending was $3,504 billion, or 20.3 percent of GDP.
Defense authorizes are included on an annual basis.
The Defense Department, the Environmental Protection Agency, the State Department, the Interior Department, and other agencies are included in the fed eral spending category.
Less than 40 per cent of federal spending is discretionary.
Nondefense spending makes up 4.3 percent of GDP.
Discretionary funds can be used for activist fiscal policy.
They can either authorize additional spending by govern ment agencies or urge agencies to accelerate their current spending plans.
The agencies will not spend the funds immediately because it takes time for the bureaucracy to act.
Unless Congress changes the laws, these expenditures must be made by the federal government.
Individuals are entitled to benefits only if they meet the requirements of Congress.
The rules can be changed by congress.
This category of spending is "mandatory" only to the extent Congress keeps the current programs in place.
A federal government program to provide retirement payments to retirees as well as a host of other benefits to widows and fami retirement support and a host of other lies of disabled workers.
Spending on Social Security is more than the federal government's health program.
Other pro older adults are provided by the government.
The amount of benefit is based on the recipient's federal and state government health.
Medicaid is a means-tested program.
Net interest is the interest the government pays on the debt held by the public.
The government borrows money later in the chapter.
The total net interest payments to the public were $229 billion, or 1.3 percent of GDP.
The level of interest rates and total government debt are related to total expenditures on net interest.
Higher net interest payments by the government will be caused by increased government debt and higher interest rates.
Both individuals and businesses pay taxes to the federal government.
The table shows the federal government's revenues in dollar and percent of GDP.
The categories that comprise total federal revenue are reviewed.
Tax returns must be filed by April 15 of every year.
The tax due the federal government is paid evenly over the year in which it is earned if taxpayers are not subject to withholding or who earn income through investments.
Social insur ance taxes make up 80 percent of federal revenue, and are almost as large as individual income taxes.
Social insurance taxes are paid only on wages and not from investments.
The "death tax" is levied on the estates and previous gifts of individuals when they pass away.
Small estates didn't pay tax on estates that exceeded a threshold of $5.34 million per person.
The estate and gift tax generate a lot of controversy.
Opponents of the tax argue that the tax destroys family-held businesses, such as family farms that were passed down from one generation to the next.
Proponents say the tax is necessary to prevent unfair wealth distribution across generations.
Corporations pay a tax on their earnings.
The tax raised about 11 percent of federal revenues.
The tax has been an important source of revenue in the past, but has fallen to a relatively low level today.
This decline has been attributed to many factors, including falling corporate profits as a share of GDP, the growth of opportunities for tax shelters, incentives provided by Congress to stimulate business investment and research and development, and complex rules for taxing multinational corporations that operate on a global basis.
More businesses are being conducted in organizational structures that are not subject to the corporate tax.
Individual tax returns report income from those businesses.
The government's other sources of revenue are small.
That is a politician's dream.
There would be more money for politicians to spend because people would face lower tax rates.
Arthur Laffer argued in the late 1970s that there was a chance we could do this in the U.S. economy.
The basis for supply-side economics was created by Laffer's views.
Supply-side economists look at the effects of taxes not just on aggregate role that taxes play in the supply of output demand, but also on aggregate supply.
Changes in taxes can change the aggregate supply curve.
If this were the case, the government tax revenues would not collect any revenue from the tariffs.
If the government cut the rates and rates, it would cause people to buy imported goods, which in turn would cause economic activity to be discouraged.
Lower taxes could lead to higher government revenues.
Laffer's tax revenue idea won't work when it comes to broad-based income taxes or payroll taxes, according to most economists.
M10_OSUL5592_09_GE_C10.indd 239 3/15/17 9:06 PM cutting rates from their current levels would simply reduce the revenues the govern ment collects because most economists believe the supply of labor is not as sensitive to changes.
Some taxes, such as tariffs or taxes on the gains investors earn by holding stocks and bonds, are plausible.
The amount of government tax revenue.
Suppose the government wants to spend more than it makes in a year.
To spend the $100 billion, the government needs funds.
It will borrow money from the public by selling bonds.
When the public purchases $5 billion of these bonds, they transfer $5 billion to the government.
The public will get its $5 billion back with interest.
The amount by which the government backs bonds it sold to the public.
In a given year, many political and economic considerations are involved.
Fiscal policy has been used historically in the United States in the last part of the chapter.
Other political considerations that influence fiscal policy are explored in later chapters.
Government spending and tax revenues are very sensitive to the state of the environment.
Because tax collections are based on individual and corporate income, tax revenues will fall during a recession.
During a recession, government transfer payments for programs such as unemployment insurance and food stamps will increase.
The result is higher government spending and lower tax collections.
When the economy grows rapidly, tax collections increase and government expenditures on transfer payments decrease, and the likeli hood of the federal government running a surplus is greater.
Imagine an economy with a balanced federal budget.
The economy was plunged into a recession after an external shock such as a dramatic increase in oil prices.
A budget deficit is caused by tax revenues falling and expenditures increasing.
The deficit is useful in stabilizing the economy.
Increased transfer payments such as unemployment insurance, food stamps, and other welfare payments increase the income of some households, partly offsetting the fall in household income.
Some households pay less in taxes when their incomes are falling.
Consumption spending doesn't decline as much because incomes don't fall as much.
Corporations tax depends on profits and taxes on businesses do not.
Businesses that have lower corporate taxes are less likely to cut spending during a recession.
Part of the adverse effect of the recession is offset by the government deficit.
Transfer payments fall and tax revenues increase during an economic boom.
Higher household income and higher corporate profits would be accompanied by an increase in consumption and investment spending.
Automatic stabilizers do not require explicit action GDP without requiring policymakers to change the law.
Take explicit action because of the long inside lags.
Fiscal policy is designed to help the economy.
If the budget were initially balanced and the economy went into a recession, a budget deficit would emerge as tax revenues fell and expenditures increased.
policymakers could either increase government spending or cut taxes An important point to remember is that both actions would increase the deficit.
This is the right policy despite concerns about increasing the deficit.
Raising taxes or cutting spending would make the recession worse.
We should focus on what our fiscal policy actions do to the economy instead of what they do to the deficit.
Large budget deficits can have an adverse effect on the economy.
We can easily understand the basic problem when we explore these issues in more detail in a later chapter.
When an economy is operating at full employment, output must be divided between consumption, investment, government spend ing, and net exports.
The government would run a deficit if it cut taxes for households.
Consumer spending will increase as a result of the reduced taxes.
Some of the tax cut may be saved by consumers.
The other component of output must be reduced or crowded out because output is fixed.
Crowding out is a principle of opportunity cost.
The opportunity cost of something is what you sacrifice to get it.
We usually expect the increased consumption spending to come at the expense of reduced investment spending.
The economy will grow more slowly in the future because of reduced investment spending.
The bud get deficit will increase current consumption but slow the growth of the economy in the future.
This is the main concern with budget deficits.
One way to understand the concern about long-run deficits is to think about what happens in the financial markets when the government runs large deficits.
The government will have to sell bonds to raise money as it runs large deficits.
Competition will increase in the financial markets as businesses try to raise funds from the public to finance their investment plans.
It will be more difficult and costly for businesses to raise funds because of the increased competition from the government.
Yu Juo was skeptical that raising rates would raise revenues.
Revenue estimators in Washington, D.C. do not share all of Yu Juo's wisdom.
The idea that cutting tax rates might increase tax on the loss in potential revenues to the government is not true.
One of the 12 wise men who succeeded Confucius in ancient China had a source that was very similar to the author's rendition of The Analects of Confucius.
Duke Ai asked if it had been a year of famine.
The fiscal policies that Congress and the president use have evolved over time.
The basic principles of fiscal policy have been known for a long time and were discussed in the 1920s.
It took a long time for economic policy decisions to be based on these principles.
President Franklin Roosevelt's actions during the Great Depression of the 1930s are associated with active fiscal policy in the United States.
Modern fiscal policy was not believed in by politicians in the 1930s because of their fear of government budget deficits.
During the 2 years of the Great Depression, 1931 and 1936, fiscal policy was expansionary according to Brown.
Presidents Herbert Hoover and Franklin Roosevelt objected to the large payments Congress made to veterans.
Although government spending increased during the 1930s, taxes increased enough to cause no net fiscal expansion.
The growth in military spending at the start of World War II in 1941 helped pull the economy out of a decade of poor performance.
To see fiscal policy in action, we need to go back to the 1960s.
Modern fiscal policy came to be accepted during the presidency of John F. Kennedy.
Walter Heller was the chairman of the president's Council of Economic Advisers.
The economy was operating far below its potential, and a tax cut was the perfect medicine to bring it back to full employment.
The unemployment rate when Kennedy was in office was 6.7 percent.
The "natural rate" of unemployment, that is, the unemployment rate at full employment, was only about 4%.
Kennedy put forth an economic program based on modern fiscal policy principles after he convinced him of the need for a tax cut.
The tax cut was supported by the Kennedy administration.
Tax rates were very high.
The top individual tax rate was more than double what it was today.
The tax rate for corporations was 52 percent compared to 35 percent.
Even if a tax cut led to a federal budget deficit, it was not a problem.
In 1961, the federal deficit was less than 1 percent of GDP, and future projections indicated it would disappear as the economy grew.
Following Kennedy's assassination, Lyndon Johnson enacted the tax cuts.
Both individuals and corporations had permanent cuts in their rates.
It is difficult to estimate the effects of tax cuts on the economy.
To make a valid comparison, we need to estimate how the economy would have behaved without them.
The economy grew at a rapid rate after the tax cuts.
Real GDP grew at an average rate of 4 percent per year from 1963 to 1966.
There is a chance that the economy could have grown even faster without the tax cuts.
The rapid growth during this period suggests the tax cuts had the effect of stimulating economic growth.
Modern fiscal policy was used in 1968.
Unemployment fell to very low levels as the Vietnam War began.
The unemployment rate fell from 1966 to 1969 Policymakers were concerned that the economy was overheating and would lead to a higher inflation rate.
A tax surcharge of 10 percent was put in place in 1968.
The surcharge raised the taxes paid by households by 10 percent.
The surcharge was designed to last for a year.
The surcharge didn't decrease consumer spending as much as economists had thought.
It was temporary, part of the reason.
An estimate of a household's long-run is an example.
She consumes $45,000 because she knows her permanent income is $50,000.
If her income is higher than her age, she is still likely to consume $45,000 and save the rest.
During the Vietnam War, there was a 1-year tax surcharge.
Consumers didn't change their spending habits much because they knew the surcharge wasn't permanent.
Households' savings were reduced by the surtax.
Demand for goods and services was lower than expected.
There were many changes in taxes and spending in the 70s, but no major changes in fiscal policy.
Changes to fiscal policy were relatively mild in 1975, despite the fact that there was a recession in 1973.